1. Field of the Disclosure
This disclosure relates generally to shifting financial risks from one contracted party to another and, more specifically, relates to a system and method to monitor and track proof of insurance requirements and shifting the risk of inadequate insurance coverage to the appropriate party.
2. Brief Description of the Related Art
Currently, verifying insurance coverage is a complicated and labor intensive task. In a typical situation, an Indemnitee contracts with an Indemnitor and the contract between the parties includes provisions that require the Indemnitor to obtain and provide evidence of insurance coverage. The insurance coverage of the Indemnitor covers situations to reduce the Indemnitee's risk to potential lawsuits that could result from an incident related to the Indemnitor's responsibilities, work and/or negligent acts. In many instances, the contract requires the Indemnitor to purchase specific insurance, naming the Indemnitee as an additional insured and to indemnify and/or defend the Indemnitee against certain claims and losses from the Indemnitor's acts.
To ensure that the contractual insurance requirements are met, the contract typically requires the Indenmitor to provide proof of the required insurance. The Indemnitor typically provides proof of insurance to the Indemnitee by providing the Indemnitee with a certificate of insurance and copies of insurance policy endorsements. Typically the certificate of insurance is on a form provided by the Association for Cooperative Operations Research and Development (ACORD). The certificate of insurance is issued by the Indemnitor's insurance agent or broker and is then sent to the Indemnitee.
The certificate of insurance may include multiple types of insurance provided by multiple insurance policies, with each policy having its own policy number and expiration date. Oftentimes the Indemnitor may utilize different insurance agents for the various types of insurance they purchase. In this situation, the Indemnitee may receive more than one certificate of insurance as proof of insurance as required by the contract.
The task of tracking and monitoring compliance with the insurance provisions of a contract is typically completed manually. The Indemnitee requests the proof of insurance and tracks compliance with the contractual insurance requirements. In addition, each contract often has unique contractual insurance requirements including terms that are situation specific. Therefore, the unique contractual requirements create a logistical burden on the Indemnitee since the determination of contract compliance requires evaluating whether each certificate of insurance provides proof of insurance for each required type of insurance coverage. The verification typically includes: a) that limits match or exceed the contractual requirements for each insurance type; b) that the cancellation notification meets the contractual requirements; c) that the insurance policies are in force and have not expired; d) that any special requirements or extensions in coverage, or endorsement information, is included; e) that the insurance company providing the required insurance coverage meets the minimum financial rating, such as a certain A.M. Best rating; and f) that the Indemnitee, or other interested party, has been properly added to the insurance policy as an additional insured.
Manually collecting and verifying multiple certificates of insurance from each Indemnitor is a burdensome task. The process is labor intensive, costly and time-consuming. The process requires the drafting, tracking, and sending out of multiple letters with follow-up telephone calls. The burden increases greatly when the Indemnitee has a large number of contracts. Some companies do not have the resources required to conduct or properly complete the insurance verification process.
In addition, the terms of many contracts extend over multiple years, and insurance policies expire annually and most likely are not coterminous with the contract period. Therefore, requests must be made every year by the Indemnitee regarding the Indemnitor's insurance coverage in order to ensure ongoing compliance.
The most accurate way for the Indemnitee to verify insurance coverage of the Indemnitor is to request and receive copies of the relevant insurance policy endorsements from the issuing insurance carrier, since they are part of the policy. Policy endorsements, however, can be more difficult to obtain than certificates of insurance and require additional resources to track and review endorsements.
If an incident occurs, the Indemnitor and the Indemnitee, and possibly other interested parties, may be held legally liable for the damages associated with the incident. Examples of such an incident may include:
1. A visitor to a building injures himself when visiting a tenant. The visitor may bring an action against the tenant (Indemnitor) and the landlord (Indemnitee);
2. A family purchases an item that causes harm to a family member. The parents may bring an action against the store that sold the item (Indemnitee) and the item manufacturer (Indemnitor); and
3. A public works project has faulty workmanship and injures a pedestrian. The pedestrian may bring an action against the city (Indemnitee) and the general contractor (Indemnitor).
If the Indemnitor does not have the appropriate insurance coverage as required by the contract, the Indemnitee will not be able to transfer the exposure to the Indemnitor and may be held liable in a cause of action brought by the injured party. The Indemnitee then must attempt to recover its financial loss caused by the non-compliance of the Indemnitor by bringing a cause of action against the Indemnitor for damages.
The current method of enforcing insurance coverage of a party and transferring risk back to that party is too burdensome and costly and a need for a better method is present.